Bank Negara Malaysia has set 31 March 1998 as the deadline for the finance companies to identify their merger partners and agree in principle to the terms and conditions of the merger. Under the merger programme, Bank Negara Malaysia has identified four Tier-1 finance companies and one or two others as anchor finance companies to merge with the small and medium-size finance companies.
Bank Negara Malaysia announces today that all finance companies have responded to the Bank's call to merge and that the first stage of the merger programme has been successfully completed. The six anchor finance companies that have agreed to merge with the smaller finance companies and their respective merger partners are as follows :
|Anchor Finance Company||Merger Partner|
|1. Mayban Finance Berhad||Amanah Finance Malaysia Berhad|
|2. Public Finance Berhad||Kewangan lndustri Berhad|
Boon Siew Finance Berhad
|3. Hong Leong Finance Berhad||Bolton Finance Berhad|
Kewangan Bersatu Berhad
|4. Arab-Malaysian Finance Berhad||Abrar Finance Berhad|
Advance Finance Berhad
|5. EON Finance Berhad and Credit Corporation (Malaysia) Berhad||City Finance Berhad|
Cempaka Finance Berhad
Perkasa Finance Berhad
|6. United Merchant Finance Berhad||BBMB Kewangan Berhad|
Perdana Finance Berhad
Delta Finance Berhad
To ensure that the financial position of the acquiring anchor institution is not weakened, and for the Government to contribute its part in this effort to consolidate the industry through the merger process, the Government will extend a one year guarantee to the acquiring anchor institution in the event of any further reduction in value of the acquired assets which will be determined after a due diligence review.
In addition to the above, two banking groups will also be acquiring interest in two other finance companies. Affin Holdings Berhad will acquire a majority stake in ACF Holdings Berhad which has a wholly-owned finance company, Asia Commercial Finance (M) Berhad (ACF). Affin Holdings plans to merge the operations of its whollyowned finance company, Affin Finance Berhad with ACF. In addition, Bank of Commerce, which at present does not have a finance company, will enter into a strategic alliance with MBf Capital Berhad through a share swap involving an acquisition of at least 30% interest in MBf Finance Berhad in exchange for a 20% stake in Bank of Commerce (M) Berhad. These transactions will not be entitled to the one-year Government guarantee.
Besides the above mergers, the consolidation will also be achieved through the absorption of assets and liabilities of the finance companies by commercial banks within the group. Finance companies whose business will be absorbed by commercial banks within the group are listed below:
|1. PhileoAllied Finance (Malaysia) Berhad|
2. Southern Finance Company Berhad
3. Hock Hua Finance Berhad
4. RHB Finance Berhad
5. Sabah Finance Berhad
6. Chew Geok Lin Finance Berhad
7. Oriental Finance Berhad
8. Multi-Purpose Finance Berhad
9. Kewangan Utama Berhad
10. BSN Finance Berhad
|11. HSBC Finance (Malaysia) Berhad|
12. United Overseas Finance (M) Berhad
13. OCBC Finance Berhad
14. OUB Finance (Malaysia) Berhad
In all the 14 cases above, the commercial banks will not be entitled to the one-year Government guarantee and they will not be allowed to conduct new hire-purchase business. The commercial banks are only allowed to manage and wind down the existing hire-purchase portfolio of the finance companies.
The details of each merger will be announced by the respective institutions. Bank Negara Malaysia will continue to facilitate the merger process to ensure that the finance company industry will be successfully consolidated. After the consolidation process, the number of finance companies will be reduced from the present 39 to 8 institutions, of which 4 are Tier-1 institutions. Seven finance companies have already complied with the new capital funds requirement of RM600 million ahead of the compliance deadline of end-2000. Although one finance company has yet to achieve the RM600 capital funds requirement, it has already complied with the interim requirement of RM300 million, and has given an undertaking to comply with the RM600 million capital requirement by the stipulated deadline. Although a majority of the finance companies have met the minimum net shareholders' funds requirement under the Two Tier Regulatory System, Tier-1 status will only be accorded to finance companies that have met the stringent requirements under the CAMEL framework. Full details of the merger programme are attached as Appendix.
Bank Negara Malaysia wishes to assure all depositors that in all the merger transactions above, the deposits and accrued interests with all finance companies are fully guaranteed by the Government.
Bank Negara Malaysia
31 March 1998
Details of Merger Programme for Finance Companies
The merger programme is one of the measures undertaken by Bank Negara Malaysia to consolidate the finance company industry which is currently the most fragmented industry. The programme is also part of an overall pre-emptive strategy of BNM to further increase the resilience of the finance companies to withstand any risk from the slowdown in the economy. Although there are 39 finance companies, more than 70% of the finance company business is concentrated in 5 or 6 larger finance companies. Bank Negara Malaysia has identified four Tier-1 finance companies and one or two others as anchor finance companies to merge with the small and medium-size finance companies. Bank Negara Malaysia has set 31 March 1998 as the deadline for the finance companies to identify their merger partners and agree in principle to the terms and conditions of the merger.
Mergers would only be allowed if the merged entity would be fully capitalised at all times. Final approval would be contingent upon the completion of upfront due diligence review by reputable international accounting firms. The due diligence would also assess the possible further deterioration in asset quality during the course of the year. By strict upfront due diligence in arriving at the purchase consideration, BNM is ensuring that the merger programme would be market-based and transparent and that the purchase consideration would be fair to all parties.
In cases where the assets and liabilities of the finance company are absorbed by the commercial bank within the group, the commercial bank would be allowed to convert some of the finance company branches to commercial bank branches. Foreign-owned banks that absorb the business of their finance company subsidiaries would be allowed to relocate the same number of their existing bank branches. In all these cases, the commercial banks will not be allowed to conduct new hire-purchase business. The commercial banks are only allowed to manage and wind down the existing hire-purchase portfolio of the finance companies.
To ensure that the financial position of the acquiring anchor institution is not weakened, and to ensure that the Government contributes its part in this effort to consolidate the industry through the merger process, the Government will extend a one year guarantee to the acquiring anchor institution in the event of any further reduction in value of the acquired assets. It is emphasised that the guarantee will apply only to the valuations established after due diligence, hence minimising any risks to the potential use of government resources. In view of the strict due diligence process, any potential use of government resources is expected to be small. The use of government resources would be done consistently in an explicit and transparent way, through direct government allocation built into the budgetary framework, or through explicitly quantified tax credits. The Government's interests will be protected throughout the merger process (from the commencement of due diligence through final closure of the merger process) in order to ensure that any claims on Government are fully substantiated.
To protect the interests of the Government, and minimise costs, efforts in loan recovery will continue and specific incentives are being incorporated into the programme so that there is sharing of any upside benefits between the Government and the acquiring finance companies. Under this arrangement, 80% of all recoveries or liquidation of assets of the institution being acquired will accrue to the Government, while the remaining 20% will go to the acquiring institution.
The acquiring institutions are given the flexibility to implement cost rationalisation measures that may be necessary for future viability and in order for them to realise maximum benefits from the mergers.
To ensure that the finance company industry continues to remain sound, the minimum risk-weighted capital ratio requirement for finance companies will be raised gradually from 8% to 10% with effect from 1 January 2000 with an interim ratio of 9% to be complied with by the end of 1998. The minimum capital funds for finance companies will also be progressively increased from the current RM5 million to RM300 million by end-June 1999 and subsequently to RM600 million by end-2000. Except for one finance company which has a combined shareholders' funds of more than RM400 million, the other seven finance companies have complied with the new capital funds requirement of RM600 million. Nonetheless, this finance company has already complied with the interim requirement of RM300 million and has given an undertaking to comply with the RM600 million capital requirement by the stipulated deadline.
BNM will be reviewing the regulatory framework governing the operations of finance companies as well the scope of finance company activities after the consolidation of the finance company industry has been completed.